Germany’s Bold Fiscal Reforms: Debt Brake Loosening & €500B Growth Push

After a prolonged period of economic stagnation—two years of recession and weak growth forecasts—Germany under Friedrich Merz has made what many are calling a “Merz moment,” where bold reform measures, large-scale investment initiatives, and changes to fiscal rules are being bet upon to revive growth across infrastructure, defense, and climate sectors.

At the heart of the reform package is the amendment to Germany’s Basic Law in March 2025. One major change exempts defense spending exceeding 1 percent of GDP from the constitutionally enshrined debt brake (Schuldenbremse). A €500 billion special fund was also established to be deployed over a ten-to-twelve-year horizon for infrastructure modernization and green investment.

These reforms have prompted investment banks and private-sector players to reposition: there is evidence of renewed deal-making appetite, as multiple infrastructure deals are underway, and industry leaders—including Siemens and Deutsche Bank—have joined a “Made for Germany” initiative pledging €631 billion in investment by 2028.

Nevertheless, the outlook remains tempered. According to Germany’s IMF Article IV staff conclusions, projected real GDP growth remains modest—approximately 1 percent in 2026, rising to 1½ percent in 2027—unless reforms are deepened. Key structural issues include workforce shrinkage, red tape, stagnant productivity, and potential mismatches between fiscal expansions and efficiency.

Strategically, for investment bankers this moment offers multiple opportunities: infrastructure financing, defense sector suppliers, sustainability-linked utilities, digitalization, and tax-reform beneficiaries. But to capture upside, banks will need to monitor policy implementation, regulatory clarity, and the real outflow of capital beyond announcements. Political opposition—especially from the Greens over defense spending, from “fiscal hawks,” or from states—may shape constraints, as will macroeconomic risks like inflation, rising interest rates, or slowing external demand.

Open questions include: Will the reforms translate into an M&A rebound in sectors beyond infrastructure? Can Germany sustain higher defense and climate investment without compromising fiscal discipline? How will investors evaluate risk in a region facing both internal political fragmentation and global instability? And—to what extent will German reforms interact or clash with EU-level rules and expectations (e.g., Stability and Growth Pact)?